July Prepayment Speeds
August 7, 2017
July prepayments contained no surprises, decreasing for FNMA, FHLMC, and GNMA. Day count was the main driver behind this decrease: July contained two less business days than June, which should result in a 9% decline overall. FNMA MBS prepays fell the most, 8% for both thirty and fifteen years, while thirty-year GNMA II MBS prepayments only dropped 3%. Adjusting for day count, July prepayment numbers reverse the increases observed last month. For most portfolio managers, July prepayment speeds should represent a status quo for mortgage-related securities holdings. The small prepayment increases underlying June’s mortgage factor data apparently do not represent a trend.
Newer and slightly seasoned MBS slowed much less than more seasoned collateral, especially seasoned, higher-coupon collateral. The small dip in June mortgage rates, to the lowest levels this year, probably inspired some refinancing among the less seasoned mortgage holders, while the population of seasoned loans burned out under prior bouts of similar or lower rates. The average thirty-year conventional mortgage quote in the Bankrate survey reached 3.75% on June 6th.
Mortgage rates stayed in a relatively tight range during recent months. The last four months thirty-year mortgage rates have averaged 3.86%, according to Bankrate, with the high and low being only 0.25% apart. Fifteen-year mortgage rates performed similarly over the same time period, averaging 3.06% with the high and low only being 0.18% apart. Hence, many mortgage holders have had limited interest rate incentive to refinance for some time. However, fifteen-year mortgage rates dropped below 3% for this first time since the Election, marking 2.99% last Friday, which may lead to a small increase in fifteen-year prepayments in the future because of headline risk.
August has three more business days than July. Based on day count alone, August MBS prepayments should increase 15%. However, a weak housing market and seasonal factors will likely result in a less than 15% increase. Barring any political turmoil, the HARP program will come to a close at the end of September, which may lead to a slightly higher increase in very seasoned, higher-coupon collateral, as some of the remaining eligible population takes advantage of the program before its expiration.
Director of Investment Product Strategies